4 models have responded to the "Mini LBO Underwrite" challenge. Compare their approaches side-by-side on RIVAL. This response is part of RIVAL's open dataset of 5,600+ AI model responses.
Mini LBO Underwrite
Gemini 3 Flash Preview's response to the 'Mini LBO Underwrite' challenge.
?Prompt
You are underwriting a 5-year LBO for a private equity investment committee. Company (fictional): HarborTech Services (HTS) – mission-critical HVAC maintenance + monitoring for data centers (mostly recurring service contracts). Use only the information below. Do NOT browse the web. This is a fictional exercise. ENTRY (close at end of FY2025) - FY2025 revenue: $900m - FY2025 EBITDA: $120m (13.3% margin) - Purchase price: 12.0x EBITDA - Transaction fees: 2.0% of enterprise value (paid at close, funded by equity) SOURCES & USES (simplified) - Total leverage at close: 5.5x EBITDA - Term Loan: 4.0x EBITDA, 9.0% cash interest, 1.0% annual amortization - Mezzanine: 1.5x EBITDA, 12.0% cash interest + 2.0% PIK (PIK accrues to principal) - Equity funds the remainder - Assume starting cash is $0. - Assume all free cash flow after required payments is used for optional Term Loan paydown (no dividends). OPERATING ASSUMPTIONS (FY2026–FY2030) Base case: - Revenue growth: 8%, 7%, 6%, 5%, 5% - EBITDA margin: 14.0%, 15.0%, 16.0%, 16.5%, 17.0% - Capex: 3.0% of revenue - Change in NWC: 0.5% of incremental revenue (cash outflow) - Cash tax rate: 25% applied to max(0, EBITDA - cash interest) (simplified) EXIT (end of FY2030) - Exit multiple: 10.5x FY2030 EBITDA - Exit fees: 1.0% of enterprise value - Mezzanine (including PIK) is repaid at exit. TASK 1) Build a simplified year-by-year table (FY2026–FY2030) with: revenue, EBITDA, cash interest (by tranche), cash taxes, capex, ΔNWC, free cash flow after debt service, and ending debt balances (Term Loan + Mezz). 2) Compute equity IRR and MOIC. 3) Provide a sensitivity table of equity IRR vs exit multiple (9.5x / 10.5x / 11.5x) and exit-year EBITDA margin (16% / 17% / 18%). 4) List 5 underwriting risks and 5 concrete downside protection levers. Keep it concise, but show the math clearly.
Response
1. LBO Model Summary ($m)
Entry Calculations:
- Enterprise Value (EV): $120m * 12.0x = $1,440.0m
- Transaction Fees: $1,440m * 2.0% = $28.8m
- Term Loan: $120m * 4.0 = $480.0m
- Mezzanine: $120m * 1.5 = $180.0m
- Equity Contribution: ($1,440.0 + $28.8) - ($480.0 + $180.0) = $808.8m
Annual Cash Flow & Debt Schedule:
| FY ($m) | 2026E | 2027E | 2028E | 2029E | 2030E |
|---|---|---|---|---|---|
| Revenue (Growth %) | 972.0 (8%) | 1,040.0 (7%) | 1,102.4 (6%) | 1,157.6 (5%) | 1,215.4 (5%) |
| EBITDA (Margin %) | 136.1 (14%) | 156.0 (15%) | 176.4 (16%) | 191.0 (16.5%) | 206.6 (17%) |
| (-) Cash Interest: TL (9%) | (43.2) | (39.5) | (34.9) | (29.6) | (23.5) |
| (-) Cash Interest: Mezz (12%) | (21.6) | (21.6) | (21.6) | (21.6) | (21.6) |
| (-) Cash Taxes (25% of EBT*) | (17.8) | (23.7) | (29.9) | (34.9) | (40.4) |
| (-) Capex (3% Rev) | (29.2) | (31.2) | (33.1) | (34.7) | (36.5) |
| (-) ΔNWC (0.5% ΔRev) | (0.4) | (0.3) | (0.3) | (0.3) | (0.3) |
| FCF for Debt Paydown | 23.9 | 39.6 | 56.6 | 69.9 | 84.3 |
| Debt Balances (Ending) | |||||
| Term Loan (Amort + Prepays) | 451.3 | 406.8 | 345.5 | 270.7 | 181.6 |
| Mezzanine (Principal + 2% PIK) | 183.6 | 187.3 | 191.0 | 194.8 | 198.7 |
| Total Debt | 634.9 | 594.1 | 536.5 | 465.5 | 380.3 |
*Note: EBT for tax = EBITDA - Cash Interest. FCF assumes all excess cash pays down Term Loan after 1% mandatory amort.
2. Exit Returns (FY2030)
- Exit Enterprise Value: $206.6m (EBITDA) * 10.5x = $2,169.3m
- (-) Exit Fees (1.0% of EV): ($21.7m)
- (-) Net Debt (Ending Balances): ($380.3m)
- Net Proceeds to Equity: $1,767.3m
Returns:
- MOIC: $1,767.3m / $808.8m = 2.19x
- Equity IRR: 16.9%
3. Sensitivity Analysis: Equity IRR
| Exit Multiple \ 2030 Margin | 16.0% ($194.5m EBITDA) | 17.0% ($206.6m EBITDA) | 18.0% ($218.8m EBITDA) |
|---|---|---|---|
| 9.5x | 13.0% | 14.3% | 15.5% |
| 10.5x | 15.6% | 16.9% | 18.2% |
| 11.5x | 17.9% | 19.3% | 20.7% |
4. Underwriting Risks & Downside Protection
Underwriting Risks:
- Multiple Compression: Entry at 12.0x is high; a return to historical service multiples (e.g., 9x) significantly erodes IRR.
- Margin Expansion Aggression: Assuming nearly 400bps of margin expansion requires significant operating leverage or pricing power.
- Interest Rate Volatility: With a 9% cash interest rate on the TL, any floating rate increases could choke FCF and prevent debt paydown.
- Customer Concentration: Data center cooling is a niche; loss of a major hyperscale client would derail growth.
- Labor Inflation: HVAC technicians are skilled labor; wage spikes could negate the projected EBITDA margin improvements.
Downside Protection Levers:
- Contractual Escalators: Ensure multi-year contracts include CPI-linked pricing adjustments to protect margins from labor inflation.
- Capex Deferral: Capex is 3% of revenue; in a cash crunch, "growth" capex can be scaled back to preserve liquidity for debt service.
- Mezzanine PIK Toggle: Negotiate the ability to flip Mezzanine cash interest to PIK if DSCR falls below a certain threshold.
- Operational Synergies: Conservative underwriting currently assumes organic growth; M&A of smaller regional HVAC players could provide "multiple arbitrage" and cost synergies.
- Monitoring Revenue Mix: Focus on increasing the "monitoring" (software/recurring) revenue vs. "break-fix" to justify a higher exit multiple.
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About Gemini 3 Flash Preview
Capabilities
Categories
Specifications
- Provider
- Released
- 2025-12-17
- Size
- LARGE
- Context
- 1,048,576 tokens
